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GUIDELINES FOR TAXATION OF INTERNATIONAL AIR TRANSPORT PROFITS FOREWORD

The following position paper has been prepared by the International Air Transport Association (IATA) in order to explain the problems faced by international in relation to taxation on in- come imposed by States in which they operate other than their own fiscal domicile.

The International Civil Aviation Organization (ICAO), which is a specialized agency of the United Nations and the international government organisation concerned with aviation, has adopted a consolidated Resolution regarding taxation of international air transport. The primary principle of ICAO policies on taxation is that there should be reciprocal exemption for taxation on earnings of international air transport by States in respect to international airlines, yet some ICAO Contracting States have not adopted this principle.

Where a State has not adopted the principle of reciprocal exemption on taxation of earnings, as recommended by ICAO, IATA believes that taxation of international airlines by a State should be on a net income basis; that is, on income earned within the State including the appropriate deduction of all expenses incurred in respect of the services provided in relation to that State, irrespective of where the expense was incurred. These principles are consistent with the ICAO Resolution.

The information contained herein is intended to assist various Government departments and international organisations in un- derstanding the airlines’ foreign taxation problems and to provide a rational basis for discussion between Government authori- ties and international airlines. 1. INTRODUCTION 2. BACKGROUND

1.1. IATA is an association of world air transport enterprises 2.1. In contrast to IATA, ICAO is an intergovernmental operating scheduled air services under flags of countries organisation and the specialised agency of the United Nations eligible for membership in the International Civil Aviation concerned with international civil aviation. The Convention on Organization (ICAO). The stated purposes of IATA include International Civil Aviation of 1944 (Chicago Convention) sets the promotion of safe, regular and economical air transport out the charter of ICAO. The aims and objectives of ICAO for the benefit of the peoples of the world, the fostering of are to develop the principles and techniques of international air commerce, and the study of related problems. IATA’s air navigation and to foster the planning and development of Charter also commits it to cooperate with other international international air transport so as to: organisations, including ICAO and the United Nations. The a) Ensure the safe and orderly growth of international membership of IATA, as shown in Appendix 1, represents civil aviation throughout the world; some 130 countries. b) Encourage the arts of aircraft design and operation 1.2. IATA is concerned with the approach of certain States for peaceful purposes; to taxation of income of international airlines serving these States. There also appear to be certain misconceptions c) Encourage the development of airways, airports, and regarding tax treaties as they affect operations, and air navigation facilities for international civil aviation; experience indicates that many tax administrations are not d) Meet the needs of the peoples of the world for safe, aware of how income is derived in foreign countries by regular, efficient and economical air transport; international airlines. This paper attempts to explain the underlying position of IATA Member airlines and to elucidate e) Prevent economic waste caused by unreasonable some of the problems faced by the industry, together with competition; background material of which tax administrations generally f) Ensure that the rights of contracting States are fully might be unaware. In addition, material is presented under respected and that every contracting State has a fair section 8 on the benefits of international air transport to the opportunity to operate international airlines; economies of States which perhaps have not to date been fully appreciated. g) Avoid discrimination between contracting States; h) Promote safety of flight in international air navigation; 1.3. From the outset it should be made clear that IATA and its members do not object to the payment of non-discriminatory, i) Promote generally the development of all aspects justly and equitably levied income taxes. They do however of international civil aeronautics. object most strenuously to taxes imposed, contrary to ICAO recommended practice, on gross receipts or turnover and to income taxes imposed on bases which do not take into 2.2. The Chicago Convention therefore recognised from account the profitability of the airline operations in that the beginning the need for improving the facilitation of State. The industry respects fully the right of autonomous international air transport by removing obstacles to free and States to impose taxes, but the nature of international airline unimpeded passage of aircraft, passengers, crews, baggage, operations which form the network of global air commerce cargo and mail across international boundaries. gives it a unique place in the economy of the States concerned. 2.3. The purpose of such facilitation is twofold. First to enable air commerce to take full advantage of the pre-eminent speed of the airplane as a medium of transportation and to prevent its’ being hampered by excessive delays for documentation and other border-crossing requirements. Secondly, to avoid the imposition by individual countries of onerous burdens on international airlines in the form of taxation, insurance requirements, user charges, and the like, so that the benefits of air transport could be extended to all States served as economically as possible.

2.4. Neither the Chicago Convention nor bilateral air services agreements negotiated between States release international airlines from compliance with all of the normal legal and commercial obligations of a foreign enterprise in that State, e.g. company qualifications, registrations and taxes.

02 TAXATION OF INTERNATIONAL AIR TRANSPORT NET INCOME BASIS 2.5. The problems of operating in a foreign country are Doc 8632 also calls on Contracting States to notify numerous. They include the provision of adequate fuel ICAO of their practice and attitude to the Resolution. supplies, the availability of on-board meals for departing A supplement to this document, which includes the current passengers, the availability of hotel accommodation in case responses of Contracting States regarding their position of aircraft delay, the remittance of proceeds of ticket sales with respect to the Council’s resolutions, can be found in free of exchange restrictions and the employment of qualified Appendix 4. experts to service the aircraft and to administer the ground facilities. 3.2. In addition, the ICAO Assembly adopted in 2001 Resolution A33-19 which among other things refines ICAO’s 2.6. The impression that international airlines do substantial distinction between a tax and a charge and urges Contracting business within States they serve is often misleading and States to follow the resolution of the Council as contained inaccurate as the business they conduct in foreign States in Doc 8632. This Resolution was since reaffirmed under is incidental and ancillary to their primary international Assembly Resolution as shown function. International airlines operate in the long term at in Appendix 5. lower margins of profit than most other businesses and differ materially from foreign business enterprises which engage in 3.3. In spite of the recommendations of ICAO, some manufacturing, merchandising, natural resources extraction States still do not provide for the reciprocal exemption of or other activities involving substantial internal presence in profits derived from the operation of foreign aircraft either the States where they are located and operate. pursuant to statutory provisions in the tax laws of the two States or by negotiation of tax treaties. Airlines from such 2.7. Taxation on a basis other than net income leading to States subsequently may be subject to income tax in other potential double taxation is one which causes significant States when they come within the jurisdictional reach of concern to the airline industry. those tax administrations.

3.4. In accordance with the ICAO Resolution, IATA’s position is that the most reasonable and equitable means of dealing with income taxation in foreign States is on the basis of 3. INCOME TAX EXEMPTION reciprocal exemption either by operation of income tax law, or by treaty. 3.1. ICAO has a longstanding policy and guidance material for States on the taxation of certain aspects of 3.5. Negotiation of full taxation treaties involves international air transport, namely: the taxation of aviation consideration of many factors and requires the ratification fuel, lubricants and other consumable technical supplies; by the governments of both countries. However, in many airline income and aircraft and the sale and use of States the income tax legislation makes provision for the international air transport, such as on tickets, passengers exemption of profits from the operation of aircraft of a foreign country where that foreign State allows a reciprocal and airline gross receipts. The ICAO Council has undertaken exemption. In these circumstances, the responsible Minister or a number of revisions to the policies on taxation and in the Commissioner of taxation is empowered to enter into an February 1999 adopted a consolidated resolution published agreement by an exchange of letters, or something equally in the Third edition of Doc 8632, ICAO’s Policies on Taxation simple. An example of legislation with this in the Field of International Air Transport, issued in 2000. provision is attached at Appendix 6. This document reaffirms and strengthens the principles underlying ICAO’s policies in this field which among other things supported a policy of reciprocal exemption in respect of the income of international air transport enterprises, Appendix 2, and opposes taxes related to the sale or use of international air transport, i.e. taxes on gross receipts Appendix 3.

TAXATION OF INTERNATIONAL AIR TRANSPORT NET INCOME BASIS 03 4. THE DETERMINATION OF TAXABLE 5. ACCOUNTING STANDARDS NET INCOME WHERE NO ICAO REC- IN THE INDUSTRY OMMENDED EXEMPTION APPLIES 5.1 In 1947, ICAO introduced a data collection on air carrier financial data which would offer the possibility to 4.1. IATA’s position is to ensure that where there is no tax identify revenues and expenses and also allow them to exemption the State allows for the taxation of international be directly compared with the related traffic carried and airlines on a net income basis. capacity offered. Commercial air carrier financial data are 4.2. IATA recognises that the amount of net income derived collected by ICAO through Reporting Form EF. The Form from any particular State by an international airline, and con- covers several financial statements as well as the traffic and sequently the income tax payable in respect of that income, capacity figures related to the financial data. These are: Part may be challenging to determine. 1 - Profit and Loss statement; Part 2 - Balance Sheet; Part 3 - Statement of retained earnings; and, Part 4 - Revenue 4.3. On the one hand, the majority of the distance flown by traffic and capacity statistics. international airlines is outside the territorial jurisdiction of the State seeking to impose an income tax and therefore it 5.2 Each year statistics and financial statements are is questionable whether that State has the right to impose published by ICAO online in ICAO Data+ (http://www.icao. income tax on revenues earned outside its jurisdiction. int/dataplus), the subscription for which is on payment by the users. As a consequence, all international airlines maintain 4.4. On the other hand, by normal international fiscal stan- their accounts on substantially similar lines. The amortisation dards, airlines operating to and from one State are often and depreciation policies adopted by each airline do not vary considered to have a branch under domestic tax laws or greatly from airline to airline due to similarity of operations permanent establishment as defined in most double taxation and the aircraft and equipment utilised. The magnitude of treaties, and that establishment could expect to come within operations carried on and the high standards of cooperation the jurisdiction of that State. among airlines due to the influence of IATA can justify the statement that the accounting results published by member 4.5. Operation of an airline to and from one State in its airlines are not only factual, but represent a high degree of global network has an economic effect on its operations in standardisation of accounting techniques. every other State of its network and vice versa. It has there- fore been considered by most tax administrations and by the 5.3 In addition, airline accounts are audited by independent airlines themselves that apportionment formulas provide a outside auditors on a regular and continuous basis so reasonable base on which to levy net income tax in States that published statements can universally be accepted as other than the State of fiscal domicile. Appendix 7 provides accurate, fair and systematic reflections of the operating a brief outline of several generally accepted net income results of the airlines concerned. apportionment formulas. 5.4 The local office/branch of an international airline is not 4.6. Any State which levies tax generally on a net income able to prepare accurate profit and loss accounts as all the basis, should allow international airlines doing business within revenue applicable to that office/branch does not accrue its jurisdiction to apportion expenses and other charges incurred locally nor is all the expenditure attributable to that office/ during the year against the revenue derived in that same period. branch paid locally. Consequently there is a significant This should be irrespective of whether these expenses or other difference between the accounting operation of the local charges were actually incurred in the State seeking to levy tax. office/branch of an international airline and the local branch This permits a reasonable determination of the taxable net of a foreign manufacturer. income of the international airline within the taxing State. 5.5 The international airline actually earns or produces 4.7. In contrast, taxation based on deemed profit or as a its revenue mainly while flying over international territory or percentage of gross revenue has no relationship to operating waters, consequently the full cost of operating aircraft used profit, could result in double taxation and is discriminatory to derive the revenue is not incurred in any one country, and regressive. IATA cannot proffer or endorse these meth- nor are those expenses which are incurred in that country ods of taxation and ICAO also does not endorse these forms necessarily appropriately chargeable solely against the of imposition. revenue attributable to that country. For example, the cost of fuel and meals uplifted in country A is a cost of only 4.8. Further, where the use of net income apportionment the first segment flown out of A. formulas by international airlines operating in a State other than the State of fiscal domicile generates a loss for any 5.6 There is no adequate matching of costs unless the fiscal period, a carryforward of the resulting loss should be expenditure is apportioned partly to traffic joining the flight allowed in accordance with that State’s domestic tax law at A and partly to the traffic already on board. Therefore, provisions on utilisation of trading losses. The nature of in- the conventional method of preparing branch profit and ternational airline profits is highly cyclical due to a number of loss accounts comprising identifiable local income and market forces including competition and the overall econo- expenditure will not produce an accurate result when mies of the States served. By allowing loss carryforwards the applied to the branch office of an international airline. State recognises that airline investments in personnel and infrastructure made in one fiscal period will benefit the State over many periods.

04 TAXATION OF INTERNATIONAL AIR TRANSPORT NET INCOME BASIS 6. CONSIDERATION OF SOME ELEMENTS OF A NET INCOME FORMULA

6.1 In an effort to determine the net operating profit or loss of B. Local Revenue an international airline in any State IATA recommends the use of net income formulas for the apportionment of the global 6.5 The calculation of the gross revenue derived in a country operating results. See Appendix 7 for examples of generally will have a bearing on the amount of income tax payable after accepted net income apportionment formulas that can be application of one of the apportionment formulas. applied. 6.6 Some tax administrations assume that airlines The following must be considered when applying net income derive their traffic revenue in the same manner as shipping formulas: companies, i.e. all local sales represent revenue of the selling airline. A. Global Net Air Transportation Profit 6.7 There is a significant difference between the derivation of 6.2 IATA believes the global net air transportation profit in revenue by shipping companies and airlines due to ‘interline’ published financial statements of international airlines should agreements and the free negotiability of IATA documentation be used for determining apportioned local net profit. The use amongst members which allows passengers to purchase, al- of the published accounts is recommended because these most anywhere in the world, travel on any number of airlines are available in the public domain and are subject to audit by as required to get them to their destination. For instance: independent professional auditors. a) Under the auspices of IATA, interline traffic agreements between airlines provide one airline with the facility to 6.3 The advantages to the revenue authorities of adopting issue its own tickets for travel on another of any number the published accounts are considerable: of IATA airlines. For this reason a standard format of a) Figures are easily authenticated. flight coupon is used by all IATA airlines including electronic tickets. Additionally, IATA tickets are freely b) The impracticability of adjusting for every minor interchangeable unless the class of travel paid for difference in tax and book treatment is avoided. happens to be one restricted to the issuing airline only, e.g. some charter or inclusive tour fares. c) Any differences between the taxable net income assessed by any State and the accounting profit of b) Normally, the carrying airline has a legal right to the the airline are substantially eliminated over the revenue applicable to its carriage less a standard rate course of time. of commission. In this event, the selling airline only retains so much of the total sale value of the original d) Using the published accounts of the international transaction as it actually carries, plus the commission airline instead of other more complicated methods received on the balance. saves considerable time and administrative effort for both the airline and the taxing State while preserving c) Where the ticket is sold by a travel agent, the selling the tax collected. airline only retains the portion of the total sale actually carried less the agent’s commission on that portion. 6.4 IATA accepts that some States may choose to apply tax adjustments to published results, for example, to recognise 6.8 All this necessarily imposes on each airline a high the difference between book and tax depreciation. degree of standardisation of accounting processes, enabling the pro-ration of the total fare paid by passengers among participating airlines. This can only be accomplished at a central accounting office, requiring highly sophisticated data processing capabilities. Much the same considerations apply to cargo shipments although usually the itinerary agreed at point of origin remains fixed.

6.9 Because of the foregoing, it is clear that total local receipts for sales of tickets rarely equals the actual local revenue of the airline issuing the ticket in any State.

6.10 In addition, gross revenue, as reflected in the airlines’ financial accounts, is flown revenue, the revenue earned when the carriage purchased by the passenger is actually performed and not sales revenue. As such, it is flown revenue which should be allocated to the country of source (see C overleaf).

TAXATION OF INTERNATIONAL AIR TRANSPORT NET INCOME BASIS 05 7. OFF-LINE CARRIERS

C. Source of Revenue 7.1 While IATA acknowledges the right of a government to im- pose taxes, it believes that income and similar taxes should not be imposed on an airline which does not have direct sales by its 6.11 The determination of the source of revenue requires own office in a foreign country. consideration of the following: a) The uplifting of a passenger in a particular State does 7.2 IATA’s position is consistent with double taxation treaties not necessarily determine the source of that revenue. that usually prescribe the minimum contact a resident of one b) A ticket sold in country A for passage on a foreign airline country can have in the other country before the status of a involves the loss of currency to that country when the permanent establishment and thus tax liability is reached. passenger boards that airline’s aircraft in country A, it is The standard form of agreement excludes from the defini- reasonable for country A’s tax administration to seek tax tion of a permanent establishment, any business carried on on the value of the carriage performed by that airline. through an independent broker acting in the usual course of his business. c) On the other hand, a ticket sold in country B for a passenger who is merely visiting country A should not be taxed in country A as tax is payable in country B 7.3 It is the IATA position that where the airline’s activities based on sale of transportation there. It is unreasonable in a foreign country is limited to the sale of tickets by its own to determine the local revenue derived by the foreign office for international transportation by air, its function in the airline in country A by taking the gross uplifts of pas- jurisdiction is similar to that of a ticket broker and therefore sengers. Nevertheless, the passenger from country B one method to determine its taxable results could be by contributes considerably to country A’s economy, by way deducting from the commission earned on the sale of tickets, of hotel accommodation, meals, local sightseeing tours, including deemed commission on its own sales, the amount purchases of souvenirs, etc. of local costs incurred in earning that commission. d) Airline tickets are frequently written to include several airlines, depending on the itinerary of the passenger, in addition to the airline who sold the ticket. By agreement, the airline uplifting the passenger claims its share of 8. BENEFITS OF INTERNATIONAL revenue for carriage from the issuing airline. Additionally, AIR TRANSPORT TO COUNTRIES a ticket once issued can be surrendered, partly used, or may be used on airlines different from those named on IT SERVES the original ticket. 8.1 The impact of international air transport on national economies is considerable in terms of benefits directly and e) If revenue derived from the issue value of tickets is the basis of taxation it is impossible to apportion the tax to indirectly traceable to airline operations. The more signifi- all airlines involved as these are not known for certain cant benefits include income flow from expenditures and the until after the passenger travels, and it is completely income multiplier effect, employment, commercial and trade inequitable for the issuing airline to bear the whole advantages brought by speed of business air travel and burden of any income tax. air freight, tourism, improved communications, civil aircraft maintenance and overhaul, foreign exchange earnings and f) As such, revenue sourced to a State should include contributions to balance of payments. only revenue accruing to the operating airline, excluding revenue claimed and remitted to other airlines. Airlines are able to produce this information on a consistent A. Income Multiplier Effect and accurate basis although not all use precisely the same accounting methods. What has been said of 8.2 Expenditures by airlines, airports, and their staff and passenger revenue applies equally in respect of cargo. airlines’ passengers generate further far-reaching income flow through the multiplier process. Airlines and airports pay g) Commission can also be assigned to the point of sale salaries and wages to their employees, purchase equipment, if under the tax law it is deemed to have a source at supplies and services, and pay taxes and make other pay- the point of sale, while commission retained by other ments to governments. Similarly, air passengers purchase airlines would be excluded. goods and services in the countries or cities they visit and these all have multiplier effects.

8.3 These income flows give rise to secondary expenditures by airline and airport employees, hotels, restaurants, travel agents, freight forwarders, insurance companies, governments and other industries from which goods and services are purchased, and these too have multiplier effects on the economy. In this way, successive rounds of income and expenditure are generated by the expenditures of airlines and airports and their passengers that have an impact throughout the economy.

06 TAXATION OF INTERNATIONAL AIR TRANSPORT NET INCOME BASIS B. Employment D. Other Benefits of International Air Transport 8.4 One of the most significant advantages of international 8.9 Further expenditure and income flows are produced air transport is the way it acts as a generator of employment, by capital investment, expenditure on fuel, rents, interest, directly and indirectly. Air transport, and to a greater extent insurance, taxes and many other items. Since civil air the service industries it supports, are labour intensive and transport requires a high rate of investment in aircraft and their importance as generators of employment is increasing. aviation infrastructure this has also produced beneficial effects on economic growth. 8.5 Worldwide, the scheduled airlines directly employ 2.27 million people1 and, in addition, airline expenditures and activities, directly and indirectly, generate employment for many millions more.

C. Tourism and Trade

8.6 Tourism plays a significant part in international trade, and international air transport has made an enormous contribution to this development. Improved airline services and the availability of attractive air fares to the travelling public have been important factors in this development. Larger and fuel efficient aircraft have made an important contribution by enabling people to travel long distances quickly and by making shorter and more frequent visits possible.

8.7 Tourism spending has a strong regional and local impact, since the service industries required by tourists employ many persons. This impact comes from spending for hotel and accommodation, restaurant meals, travel agents and tour operators, local transport including taxi and car rentals, and other products and services purchased. In turn, these service industries purchase a wide range of products and services in these countries. Thus the benefits of tourist spending flow rapidly into the general economy. Certain expenditure by the tourist service industries is also made on imported goods and services, thereby stimulating international trade.

8.8 By assisting in the development of tourism and foreign trade, the airlines can make an important contribution to balance of payments positions and foreign currency earnings. Airlines are often important earners of foreign exchange in their own right. The existence of good air services also enhances the attractiveness of a country for commercial and industrial interests because of communications and trade advantages. This benefit is of considerable significance in attracting foreign investment and in creating new foreign trade opportunities.

1Aviation Benefits Beyond Borders 2014 Report available here: http://aviationbenefits.org/media/26786/ATAG__AviationBenefits2014_FULL_LowRes.pdf

TAXATION OF INTERNATIONAL AIR TRANSPORT NET INCOME BASIS 07 9. CONCLUSION

IATA recommends that:

• Each State shall grant reciprocal exemption from taxation • Whereas the autonomous right to levy taxation on the of the income of air transport enterprises of other States income of international airlines is acknowledged in each derived in that State from the operation of aircraft in State not adhering to the principles of reciprocal exemption, international air transport in accordance with the ICAO each State shall, for the taxation of foreign international air Assembly Resolution which urges Contracting States transport enterprises whose activities in that State are limited to follow the resolution of the Council as contained in to the mere sale of tickets for international transportation by Doc 8632, ICAO’s Policies on Taxation in the Field of air, adhere to the following principles: International Air Transport, as noted in Appendix 5. > The taxable result of air transport enterprises • Whereas the autonomous right to levy taxation on the selling tickets for international transportation by income of international airlines is acknowledged in each air by means of their own sales offices in that State not adhering to the principles of reciprocal exemp- State shall be determined by deducting from the tion, each State shall, for the taxation of foreign air transport commission earned on the sale of said tickets, enterprises engaged in the operation of aircraft to and from including deemed commission on own sales, the that State, adhere to the following principles: amount of local costs incurred in earning that commission. > No heavier burden of taxation shall apply to the international air transport enterprises of other > Air transport enterprises not having their own States than is applicable to an enterprise engaged offices in that State, but selling their tickets in international air transportation domiciled in that through general sales agents and/or other air State. transportation enterprises, shall not be subject to the taxation on income in that State. > Costs incurred in earning local gross income are recognised as deductible expenses irrespective • The principles outlined in this section should be applied of the country where these expenses have been not only to income tax, but also to taxes or levies of a incurred, including but not limited to the aircraft substantially similar character, by whatever name described, depreciation, financing costs and other head office imposed by a State or a subdivision of a State. costs, thereby taxing the airline on a net income basis.

> The taxable amount of each separate air transportation enterprise of another State shall be determined by means of apportionment formulas using audited worldwide accounts of the air transport enterprise. The audited accounts shall be accepted on the basis of appropriate certifications from appropriate auditors in the State in which the global accounts are kept.

08 TAXATION OF INTERNATIONAL AIR TRANSPORT NET INCOME BASIS APPENDIX 1

IATA MEMBERSHIP

ABSA Cargo Airline – Belarusian Airlines InselAir Royal Brunei BH AIR Interair S.A. Biman RwandAir InterSky SAA Aero Contractors Blue Panorama Aero República Blue1 bmi Regional and Tourism Ltd. Santa Barbara Aerolíneas Argentinas Boliviana de Aviación - BoA SAS Aerolineas Galapagos S.A. SATA Air Açores Aerogal Jet Airways SATA Internaçional Aeromexico Jet Lite (India) Ltd. Saudi Arabian Airlines C.A.L. Cargo Airlines JetBlue Co., Ltd. Airways Ltd. Airlines Air Algérie S.A. JSC Aircompany Yakutia Co. Ltd JSC Nordavia-RA SIA Juneyao Airlines SIA Cargo Siberia Airlines Air Baltic Ltd. Co. Ltd. Air Berlin Ltd. KLM Silkair China Eastern Air Caledonie Airways LACSA SriLankan Limited CityJet LAM - Linhas Aéreas de Moçam- Ltd. bique Sun Express Lan Airlines Air Lan Argentina SWISS Lan Cargo Lan Perú Syrianair LanEcuador TAAG-Angola Airlines Cubana LIAT Airlines TACA p.l.c Cyprus Airways LLC “NORD WIND” TACA Peru j.s.c LOT Polish Airlines TACV Air TAM – Transportes Aéreos del DHL Air Ltd. Mercosur S.A. DHL Aviation Lufthansa CityLine TAM Linhas Aéreas S.A. TAME – Linea Aérea del Ecuador Donavia TAP Air a.d. Beograd Dragonair TAROM Egyptair Malmö Aviation AB International Cargo THY - Inc. Estonian Air MEA TNT Airways S.A. AirBridgeCargo Airlines fly Euroatlantic Airways MIAT TransAsia Airways European Air Transport TUIfly Tunis Air EVA Air NIKI International Airlines Federal Express AlMasria Universal Airlines (NCA) UPS Airlines ALS US Airways, Inc. . UT air Àrik Air Israeli Airlines Ltd. Garuda Inc. Orenair PAL Atlasjet Airlines VLM Airlines Austral PGA – Portugália Airlines Austrian PIA Volga-Dnepr Airlines VRG Linhas Aéreas S.A.-Grupo GOL PrivatAir White Coloured by You Wideroe Hong Kong Express Airways Xiamen Airlines B&H Airlines Bangkok Air APPENDIX 2

EXTRACT OF COUNCIL RESOLUTION OF 24 FEBRUARY 1999 WITH RESPECT TO THE TAXATION OF INCOME OF INTERNATIONAL AIR TRANSPORT ENTERPRISES AND TAXATION OF AIRCRAFT AND OTHER MOVABLE PROPERTY

… Whereas with respect to the taxation of income of … 2. With respect to the taxation of income of international air transport enterprises and aircraft international air transport enterprises and taxation and other movable property: of aircraft and other moveable property: a) multiple taxation of the earnings of international air a) each Contracting State shall, to the fullest possible transport enterprises and of aircraft and other movable extent, grant reciprocally: property associated with the operation of aircraft engaged in international air transport can be effectively i) exemption from taxation on the income of air prevented by the reciprocal agreement of States to transport enterprises of other Contracting States limit taxation in these two fields to the State in which derived in that Contracting State from the operation any such enterprise has its fiscal domicile; of aircraft in international air transport; and b) for international air transport enterprises lack of ii) exemption of air transport enterprises of other implementation of this rule of reciprocal exemption Contracting States from property taxes, and capital involves either multiple taxation or considerable levies or other similar taxes, on aircraft and other difficulties of income allocation in a very large moveable property associated with the operation number of taxing jurisdictions; and of aircraft in international air transport; c) such exemptions have already been widely obtained, b) the “taxation” and “taxes” referred to in a) i) and ii) for example, through the inclusion of appropriate pro- shall include taxes levied by any national or local taxing visions in bilateral agreements aimed at avoidance authority within a State; of multiple taxation generally or in those dealing with the exchange of commercial air transport rights or c) each Contracting State shall endeavour to give through individual States adopting legislation which effect to Clause a) above, by the bilateral negotiation grants the exemption to any other State that provides of agreements relating to double taxation generally, or reciprocity; by such other methods as the inclusion of appropriate provisions in bilateral agreements for the exchange of … The Council resolves that: commercial air transport rights, or by legislation granting such exemption to any other State that provides reciprocity; and

d) each Contracting State shall take all feasible measures to avoid delays in any bilateral negotiations found necessary to achieve implementation of Clause a) above; APPENDIX 3

EXTRACT OF COUNCIL RESOLUTION OF 24 FEBRUARY 1999 WITH RESPECT TO TAXES ON THE SALE AND USE OF INTERNATIONAL AIR TRANSPORT

…Whereas with respect to taxes on the sale and use of international air transport: the imposition of taxes on the sale or use of international air transport tends to retard its further development by increasing its cost to the operator (as in the case of taxes on gross receipts or turnover), to the shipper (as in the case of taxes on cargo air waybills) and to the traveller (as in the case of taxes on tickets), and moreover, subjects the traveller to considerable inconvenience (as in the case of head taxes, and embarkation and disembarkation taxes);

… The Council resolves that: …

3. With respect to taxes on the sale and use of international air transport: each Contracting State shall reduce to the fullest practicable extent and make plans to eliminate as soon as its economic conditions permit all forms of taxation on the sale or use of international transport by air, including taxes on gross receipts of operators and taxes levied directly on passengers or shippers; APPENDIX 4

NB: This reproduces the first pages of the Supplement to Doc 8632. The full Supplement can be found at www.icao.int/publications/Pages/doc-series.aspx

SUPPLEMENT TO DOC 8632 ICAO’S POLICIES ON TAXATION IN THE FIELD OF INTERNATIONAL AIR TRANSPORT (Third Edition - 2000)

1. The attached Supplement supersedes all previous Supplements to Doc 8632 and includes information received up to 15 January 2013 from Contracting States as to their position vis-à-vis the Council Resolution on taxation in the field of international air transport.

2. Additional information received from Contracting States will be issued at intervals as amendments to this Supplement.

SUPPLEMENT TO ICAO DOC 8632 – January 2013 Table of contents

Pages Date of State in Supplement publication

Argentina 1-2 15/01/13 Mali 1 15/01/13 1 15/01/13 Malta 1 15/01/13 Australia 1-2 15/01/13 1 15/01/13 Austria 1 15/01/13 Mexico 1-3 15/01/13 Azerbaijan 1 15/01/13 1 15/01/13 Bahrain 1 15/01/13 Myanmar 1 15/01/13 Barbados 1 15/01/13 Netherlands 1 15/01/13 Belgium 1–2 15/01/13 New Zealand 1 15/01/13 Botswana 1 15/01/13 Nigeria 1 15/01/13 Burkina Faso 1 15/01/13 Norway 1 15/01/13 1 15/01/13 Oman 1 15/01/13 Cameroon 1 15/01/13 Pakistan 1 15/01/13 Canada 1–2 15/01/13 Panama 1 15/01/13 Chile 1 15/01/13 Paraguay 1 15/01/13 China 1-7 15/01/13 Peru 1 15/01/13 China (Hong Kong SAR) 1 15/01/13 Poland 1 15/01/13 China (Macau SAR) 1 15/01/13 Portugal 1-4 15/01/13 Colombia 1 15/01/13 Republic of Korea 1 15/01/13 Cuba 1 15/01/13 Republic of Moldova 1 15/01/13 Cyprus 1 15/01/13 1 15/01/13 1 15/01/13 Russian Federation 1-3 15/01/13 Ecuador 1 15/01/13 Rwanda 1 15/01/13 Egypt 1 15/01/13 Samoa 1 15/01/13 Estonia 1 15/01/13 Seychelles 1 15/01/13 Ethiopia 1 15/01/13 Singapore 1 15/01/13 Fiji 1 15/01/13 Slovakia 1 15/01/13 Slovenia 1 15/01/13 1 15/01/13 South 1 15/01/13 France 1 15/01/13 1-6 15/01/13 1 15/01/13 Sweden 1 15/01/13 1 15/01/13 1 15/01/13 Guatemala 1 15/01/13 Thailand 1 15/01/13 Hungary 1 15/01/13 The former Yugoslav Iceland 1 15/01/13 1 15/01/13 Republic of Macedonia India 1–3 15/01/13 Tunisia 1 15/01/13 Indonesia 1 15/01/13 1 15/01/13 Iran (Islamic Republic of) 1 15/01/13 United Arab Emirates 1 15/01/13 Ireland 1 15/01/13 1 15/01/13 1 15/01/13 United Republic of Jordan 1 15/01/13 1 15/01/13 Kenya 1 15/01/13 Tanzania Kuwait 1 15/01/13 United States 1-3 15/01/13 Lebanon 1 15/01/13 Uruguay 1 15/01/13 Lesotho 1 15/01/13 Uzbekistan 1 15/01/13 Venezuela (Bolivarian Lithuania 1-2 15/01/13 1 15/01/13 Madagascar 1 15/01/13 Republic of) Maldives 1 15/01/13 APPENDIX 5

EXTRACT OF ICAO ASSEMBLY RESOLUTION A38-14 ON THE CONSOLIDATED STATEMENT OF CONTINUING ICAO POLICIES IN THE TRANSPORT FIELD, APPENDIX D – TAXATION

Whereas international air transport plays a major role in the The Assembly: development and expansion of international trade and travel and the imposition of taxes on aircraft, fuel, and consumable 1. Urges Member States to follow the resolution of the technical supplies used for international air transport, taxes Council as contained in Doc 8632, ICAO’s Policies on on the income of international air transport enterprises and Taxation in the Field of International Air Transport so as on aircraft and other movable property associated with the to avoid imposing discriminatory taxes on international operation of aircraft in international air transport, and taxes aviation; on its sale or use, may have an adverse economic and 2. Urges Member States to avoid double taxation in the field competitive impact on international air transport operations; of air transport; and Whereas ICAO policies in Doc 8632, ICAO’s Policies on 3. Requests the Council to ensure that the guidance and Taxation in the Field of International Air Transport, make a advice contained in Doc 8632 are current and responsive conceptual distinction between a charge and a tax in that “a to the requirements of Member States and to continue to charge is a levy that is designed and applied specifically to promote their application more vigorously. recover the costs of providing facilities and services for civil aviation, and a tax is a levy that is designed to raise national or local government revenues which are generally not applied to civil aviation in their entirety or on a cost-specific basis”;

Whereas it is a matter of great concern that taxes are increasingly being imposed by some Member States in respect of certain aspects of international air transport and that charges on air traffic, several of which can be categorized as taxes on the sale or use of international air transport, are proliferating;

Whereas the matter of aircraft engine emission-related levies is addressed in Assembly Resolution A38-17, Consolidated statement of continuing ICAO policies and practices related to environmental protection — General provisions, noise and local air quality (Appendix H, Aviation impact on local air quality); and

Whereas the resolution in Doc 8632 supplements Article 24 of the Convention and is designed to recognize the uniqueness of international civil aviation and the need to accord tax-exempt status to certain aspects of the operations of international air transport; APPENDIX 6

Some States’ legislation makes provision for the profits derived in those States by international airlines from the operation of aircraft to be exempted from income tax on a reciprocal basis.

As an example of this type of legislation, Section 883 of the United States Internal Revenue Code reads (in part):

SEC. 883. EXCLUSIONS FROM GROSS INCOME.

883(a) INCOME OF FOREIGN CORPORATIONS FROM SHIPS AND AIRCRAFT. The following items shall not be included in gross income of a foreign corporation, and shall be exempt from taxation under this subtitle:

883(a)(1) SHIPS OPERATED BY CERTAIN FOREIGN CORPORATIONS. Gross income derived by a corporation organized in a foreign country from the international operation of a ship or ships if such foreign country grants an equivalent exemption to corporations organized in the United States.

883(a)(2) AIRCRAFT OPERATED BY CERTAIN FOREIGN CORPORATIONS. Gross income derived by a corporation organized in a foreign country from the international operation of aircraft if such foreign country grants an equivalent exemption to corporations organized in the United States. APPENDIX 7

GENERALLY ACCEPTED NET INCOME APPORTIONMENT FORMULAS

1. MARITIME FORMULA This is a single factor formula used historically by the Notes: shipping industry to measure local income. It employs sales a) Revenue derived in country ‘X’ is the same as for the revenues as the basis for apportioning the global net air Maritime formula and means net revenue having a transportation profit or loss of international enterprises. source in country ‘X’.

Revenue b) Direct operating expenditure in or related to country ‘X’ Country ‘X’ net derived from Global net air includes all station and ground costs, passenger service air transportation = country ‘X’ x transportation expenditure costs, local administrative costs, and local profit or loss profit or loss distribution costs including selling costs, advertising and Global Revenue publicity. May include additional route related costs if all direct operating expenditures are not incurred in the local country.

Notes: c) Apportioned system expenditure includes all expenditures, a) Revenue derived from country ‘X’ means the net revenue other than similar expenditure under b) incurred in other having a source in country ‘X’. countries. This item is apportioned according to the ratio of country ‘X’ revenue to Global Revenue. b) Global revenue means the total air transportation revenue appearing in the airline’s annual Profit and Loss Accounts. 3. MASSACHUSETTS FORMULA c) Global net air transportation profit or loss means the profit or loss from operating air transport, before income This method has its origin in the United States of America tax, appearing in the airline’s annual Profit and Loss and employs a concept of the involvement in country ‘X’ by Accounts. giving weight to three dominant economic factors contributing to the net result, i.e. the airline’s payroll, property employed There are variations of this formula which produce the same there, and the revenue derived from result. ‘X’, e.g.

2. CALCUTTA FORMULA Payroll in country ‘X’ = a % Under this basis a Profit and Loss Statement is prepared Total World Payroll which deducts from the revenue derived from country ‘X’ Property employed in country ‘X’ all the expenditure incurred in deriving that revenue e.g. = b % Total World Property Revenue derived from country Revenue derived from country‘X’ ‘X’ $XXX = c % Less: Total Global Revenue Direct operating expenditure in or related to country $XXX ‘X’ $XXX Global net air a + b + c% Taxable income/ Apportioned system expenditures = transportation x (loss) in country ‘X’ Country ‘X’ net air transportation profit or Profit 3 loss $XXX

Notes: Revenue derived from country ‘X’ Global Revenue and Global net air transportation Profit is the same as for the Maritime formula. APPENDIX 8

MARITIME FORMULA WORKING The annual Profit and Loss Account of Carrier A for the year EXAMPLE is as follows:

Air transportation company “Carrier A” earns income from Profit & Loss Account the transportation of passengers and freight to/from Carrier A’s country of residence (“Country A”) to Country X. Country A and Country X do not have a Double Taxation Treaty in CARRIER A - ANNUAL REPORT Year 20XX existence, nor do they have a separately executed Airline Carrier A Profits Agreement. $M

The revenues derived by Carrier A in Country X totals Net passenger/freight revenue 893 $3,000,000 which represents 0.34% of total Global Revenue Tours and travel revenue 2 for Carrier A per its Global Revenue Reports Contract work revenue 45 as follows: Other 200 Finance income 60 Total Revenue - $ 1,200 Global Revenue Report for Year 20XX “A” COUNTRY NET TOTAL REVENUE $M ($) Manpower & staff related 250

Aircraft operating variable 300 A Argentina 10,520,300 A Australia 65,320,200 Fuel 400 A Austria 5,000,000 Selling & marketing 20 A Belgium 12,000,000 A Brazil 20,000,000 Property 30 A Canada 38,000,000 Computer and communication 20 A Country x 3,000,000 Depreciation and amortisation 75 A Czech Republic 500,000 A Denmark 6,000,000 Finance costs 80 A Germany 80,000,000 Total Expenditure - $ 1,175 A Finland 5,000,000 A France 40,000,000 A Greece 2,000,000 Profit/(Loss) Before Income Tax 25 A Hong Kong 55,000,000 A Hungary 1,500,000 A Iceland 1,000,000 A India 20,000,000 A Indonesia 10,000,000 Carrier A has achieved a profit (before income taxes) for the A Italy 13,000,000 A Jamaica 200,000 year of $25,000,000. In calculating its income tax payable in A Japan 65,000,000 Country X, Carrier A applies the Maritime Formula as follows: A Mexico 2,000,000 A Mongolia 500,000 Revenue A Netherlands 3,000,000 Country ‘X’ net derived from Global net air A New zealand 6,000,000 A Nigeria 500,000 air transportation = country ‘X’ x transportation A Norway 5,000,000 profit or loss profit or loss A People’s Republic of China 100,000,000 Global Revenue A Philippines 9,000,000 A Portugal 1,500,000 A Qatar 2,000,000 The resulting taxable position for Carrier A in Country X is A Republic of Ireland 15,000,000 $85,000 (0.34% x $25,000,000). A Russian Federation 5,000,000 A Singapore 35,000,000 A Slovak Republic 2,000,000 A Spain 15,000,000 A Sweden 11,000,000 A Switzerland 20,000,000 A Thailand 8,000,000 A Turkey 6,000,000 A United States of America 100,000,000 A United Arab Emirates 6,000,000 A United Kingdom 85,000,000 A Venezuela 2,000,000

TOTAL 892,540,500

COUNTRY X % of Global Revenue 0.34% CALCUTTA FORMULA MASSACHUSETTS FORMULA WORKING EXAMPLE WORKING EXAMPLE This example below assumes the same facts above as well Again, this example below assumes the same facts above as as the following additional information in relation to Carrier A’s well as the following additional information for Carrier A. expenditure. • Payroll in country X = $420,000 Direct operating expenditure in Country X: • Total world payroll (per Carrier A Annual Report) = $250,000,000 $ • Value of property employed in country X = $200,000 Station and ground costs 575,000 • Value of total world property = $100,000,000

Passenger service costs 405,000 Applying the Massachusetts Formula in calculating its income tax payable in Country X, the resulting taxable position for Administrative and distribution costs 260,000 Carrier A in Country X is as follows: Other operating costs 190,000

Total direct operating expenditure 1,430,000 Payroll in country ‘X’ 420,000 in Country ‘X’ = Total World Payroll 250,000,000 = 0.168 %

Apportioned system expenditure is calculated as follows: Property employed in country ‘X’ 200,000 = a) All expenditure excluding direct operating expenditure in Total World Property 100,000,000 Country X and all other countries = $442,705,400 = 0.2 % b) Using 0.34% as a reasonable basis for apportioning the Revenue derived from country ‘X’ 3,000,000 = expenditure determined in a) above, the resulting appor- Total Global Revenue 892,540,500 tioned system expenditure is $1,505,198. = 0.34 % Applying the Calcutta Formula in calculating its income tax payable in Country X, the resulting taxable position for Carrier A in Country X is as follows: Taxable = Global net air x a + b + c% income in transportation 3 $ country ‘X’ Profit Revenue derived from country ‘X’ 3,000,000 Less = 25,000,000 x (0.168% + 0.2% Direct operating expenditure in or related to -1,430,000 + 0.34%) / 3 country ‘X’ Apportioned system expenditure -1,505,198 = 25,000,000 x 0.236% Country ‘X’ net air transportation profit or loss 64,802 = 59,000 This position paper was prepared by the Industry Taxation Working Group (ITWG), reporting to the Financial Committee of IATA. May 2015